Although we’ve seen a decent rebound in the BP share price this year, it remains well below the peaks of June 2020, which suggests that investors don’t have much confidence in the company meeting CEO Bernard Looney’s plans for a 40% reduction in oil and gas production by 2030, without hammering its margins in the process.
BP share price recovers
BP’s share price is up around 31% in the past 12 months, with a year-to-date gain of 23%, as the oil giant recovers from the pandemic shock and last year’s whopping $6.7bn loss. BP also cut the dividend, as it sought to manage a debt level of $50bn, at a time when oil prices were only just recovering from 20-year lows of $15 a barrel on Brent and a record low of -$40 a barrel on WTI.
To be fair to Looney, he inherited a tricky hand from his predecessor Bob Dudley, who appeared reluctant to take the difficult decisions in repairing the balance sheet and weatherproofing it for the challenges ahead. One year on from the launch of BP’s “Transforming while Performing” new strategy, the company has sold off a range of assets to trim down the group’s exposure to fossil fuels.
Nonetheless, the wind has been blowing towards a renewables transition for several years now, and yet BP has continued to pay huge dividends without investing for the inevitable move away from fossil fuels, as climate change has moved up the political agenda.
There has been progress on the balance sheet, as well as the debt levels, with debt now down to $32.7bn, however the business still has some way to go before it gets to a place where its reliance on crude oil and natural gas becomes less important.
The recent sharp rise in both natural gas and crude oil prices in recent months has been extremely fortuitous for BP, as well as the other oil majors, especially when you look at how the business performed in its last quarter, and the first half of this year.
Half-year replacement cost profit came in at $5.4bn, thus building on the underlying replacement cost profit of $2.6bn in Q1 and posting its best performance since 2019. The company also increased its dividend to 5.46c a share, as well as announcing a $1.4bn share buyback from its half-year surplus cashflow.
BP share price remains well below 2018 peaks
BP went on to say that with oil prices at $60 there was scope to deliver buybacks of $1bn a quarter, and to have the capacity to increase the dividend by 4%. Against that sort of shareholder largesse, it is then perhaps surprising that the BP share price has underperformed compared to where it was a year ago.
At the time of last year’s huge losses, BP’s share price was trading at around the 300p level, pretty much where it is now, and while it did fall to its lowest levels since 1995 in October last year, in the aftermath of those losses, it is still well below its 2018 peaks of 600p, with little sign of going much higher.
This is somewhat surprising given that crude oil prices are at three-year highs and natural gas prices are at their highest levels since 2014. To give an idea of how much of a good thing this is for BP is that most of BP’s profit in the first half of this year came from its oil production and operations business to the tune of $3.8bn. Gas and low carbon energy was next with $3.5bn.
Those sorts of numbers give BP the perfect opportunity to put that money to work and yet all they’ve done is invest in some wind power leases in the Irish Sea, which probably won’t have done that well given the lack of wind in the past few weeks.
Jury remains out on BP’s green strategy
BP can certainly point to bidding for wind leases, investment in solar, as well as infrastructure like EV charging stations, however the real challenges lie in building grid capacity, and there appears to be little or no investment in that, from any of the oil majors, or anyone else for that matter.
Furthermore, two of its biggest renewables projects don’t look like they are making any money. Lightsource, in which BP has a 50% stake, didn’t generate any profits in 2018 or 2019, while BP Pulse, the electric vehicle charging unit, appears to be in a similar state, with no expectation of a profit much before 2025.
The company also suffered a blow earlier this month when its head of renewables, Dev Sanyal, decided to leave for Varo Energy in Switzerland, not exactly the sort of ringing endorsement you need when shareholders have doubts about the future strategy. Let’s hope new hire Anja-Isabel Dotzenrath, who arrived from RWE, lasts a bit longer.
This quarter, and probably the rest of this year is likely to be a decent one for the likes of BP when it comes to the current level of oil and natural gas prices. Demand is likely to hold up into the winter months, however management needs to have a plan other than returning cash to shareholders.
The company can talk about “Performing while Transforming” all it likes, but it needs to prove to shareholders and the markets as a whole that it can transition to renewables in a way that doesn’t hammer its margins, and there is concern that the higher quality legacy assets are being sold off too quickly.
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